Microsoft tops profit forecasts despite slump in PC market

Confirmation that Microsoft is working on smaller Windows touch devices and an announcement that the chief financial officer is leaving livened up the company’s latest quarterly results, in which it delivered solid earnings amid a sharply declining PC market.

In its fiscal third quarter, which ended March 31, Redmond-based Microsoft exceeded analysts’ predicted estimates for profit, though the company fell just slightly short of revenue forecasts.

Buoyed largely by its traditional stronghold of business customers, Microsoft posted a profit of $6.06 billion, or 72 cents a share, on revenue of $20.49 billion.

That’s a 19 percent increase in profit and 18 percent increase in revenue from the same quarter last year. The figures are also records for third-quarter revenue and third-quarter earnings per share.

Analysts’ consensus estimate for Microsoft’s third quarter was earnings per share of 68 cents on revenue of $20.66 billion.

“Our results reflect our diversified portfolio, as well as the investments we’ve made in key strategic areas,” Chief Financial Officer Peter Klein said during a conference call with analysts Thursday.

Klein, who has been CFO for nearly four years and at Microsoft for 11, announced that he will be leaving Microsoft at the end of the fiscal year at the end of June. The company said it will name a successor from its internal ranks in the next several weeks.

In an email he sent to colleagues, Klein said he had no specific plans for now other than to work with his successor on a smooth transition, and then to spend more time with his family and to travel.

CEO Steve Ballmer, in a memo to employees, said Klein was “a key part of my leadership team and a strong adviser.”

“He helped drive the successful Skype and Yammer acquisitions, has had a profound impact on the finance profession overall, and exhibited good oversight on cost controls as CFO,” Ballmer said.

During the conference call with analysts, Klein confirmed a recent rumor that Microsoft is working with manufacturers on smaller touch devices running Windows. Such devices presumably would compete with smaller tablets such as the Google Nexus 7, Kindle Fire and iPad Mini.

Klein said those devices will arrive in the coming months and will have lower price tags.

Klein also acknowledged the challenging PC market, saying “Windows revenue has been impacted” — it was essentially flat this quarter — and that “there is no doubt the device market is evolving.”

Microsoft’s big bet in addressing that evolving market is Windows 8, introduced last year. Though Microsoft has touted in the past that sales of Windows 8 licenses were on par with sales of Windows 7 at this point in their respective life cycles, the company did not release updated figures Thursday. Nor did it say how sales of its own branded Surface computers were doing.

Klein
touted the company’s new, accelerated pace for Windows updates and innovations, and confirmed the upcoming release of Windows Blue — code name for the follow-up to Windows 8.

Microsoft is responding to a changing market in which the sales of mobile devices are rapidly overtaking those for traditional desktop and laptop PCs.

Research firms IDC and Gartner had reported earlier this month that PC sales saw their steepest drop in years, plunging 11 to 14 percent in the first three months of 2013, compared with the same quarter last year.

In light of those reports, “to see what Microsoft reported was somewhat comforting,” said Sid Parakh, analyst with investment firm McAdams Wright Ragen. “On the PC front — where most of the focus has been — clearly, there are still challenges. But you can see the enterprise piece of their business is certainly doing well.”

Microsoft’s third-quarter figures reflect a recognition of deferred revenue related to upgrade offers for Windows and Office and a video-game deferral.

Those figures were partially offset by a $733 million fine from the European Commission for not carrying through on a commitment to provide a browser choice screen in some PCs sold in the European Union.

Without those adjustments, in the third quarter, Microsoft posted earnings per share of 65 cents on revenue of $18.83 billion.

Here’s how Microsoft’s divisions did:

Windows and Windows Live: $5.70 billion revenue, a 23 percent increase from last year. But those figures include recognition of revenue related to a Windows upgrade offer. Adjusting for that recognition, revenue was essentially flat at $4.62 billion, compared with $4.63 billion for the third quarter last fiscal year.

Business (includes Office, Lync, SharePoint, Exchange, Dynamics) $6.32 billion revenue, an 8 percent increase. But those figures include recognition of revenue related to an Office upgrade offer and pre-sales. Adjusting for the recognition, the division posted revenue of $6.13 billion, a 5 percent increase.

Office 365, Microsoft’s subscription-service version of its traditional productivity suite, is on pace to become a $1 billion business by the end of the fiscal year, Klein said.

Most of that increase was driven by multiyear licensing revenue, which was up 20 percent, according to Lisa Nelson, a Microsoft director of investor relations.

Entertainment and Devices (includes Xbox, Windows Phone, Skype): $2.53 billion revenue, an increase of 56 percent. Those figures include recognition of revenue from a video-game deferral related to upgrades or enhancements to “Halo 4” that the company hadn’t yet delivered in the second quarter. Adjusting for that recognition, revenue was $2.15 billion, up 33 percent.

Online Services (includes Bing, MSN): $832 million revenue, an 18 percent increase. The loss for the quarter was $262 million, narrowed from a $480 million loss a year ago.

Microsoft shares were trading after hours at $29.56 after ending the regular trading day at $28.79, down 3 cents.